Why Is CalPERS Board Member/Governor Wannabe John Chiang Telling a Big Lie About CalPERS Private Equity Outsourcing Scheme?

Last week, California State Treasurer John Chiang, who sits on the CalPERS board, spoke to the Culver City Democrats’ Club. Chiang is running for Governor. The session was recorded and I am told the video will be posted.

During the Q&A section, someone who reads Naked Capitalism asked about CalPERS’ plans to outsource its private equity program (for details, see our recent post: CalPERS Launches Illegal, Corrupt, Unjustified and Beneficiary-Damaging Private Equity “Strategic Partner” Search Obviously Designed to Favor BlackRock):

How can CALPERS justify handing over as much as $26 billion to a costly private equity middleman and hand the business to one firm – BlackRock? Why is it being done in the first place? Other big public pension funds are going in the opposite direction – of doing more in house to reduce fees, not increase them.

Chiang’s response:

There are a few that are going in-house… My office looked at it. We put together, I wouldn’t call it quite a white paper but as we started a few years ago some of us were very interested in a Canadian model where in the Canadian model, the private equity model, did very well except once we looked at where they were making money, they were making money on oil companies in Canada.

Part of our challenge is, we’ve been trying to figure out how do we replicate a private equity performance and expertise and bring it in-house. And there is interest but to cover all the territory that the private equity companies [unintelligible few words] would be quite expensive. But we are looking into that, trying to reduce the fees and bring those services [unitelligible few words]

We got in contact with the person who grilled Chiang, who was willing to provide more detail via e-mail:

I said, off mike, at the end, “I’m not the only one who reads Naked Capitalism.” In other words, your garbage answer is not going to get you that far in circles more sophisticated than the Culver City Dem Club.

At the very end, I went over to him again when people were just chatting him up. I said, this is going to be a problem for you. Your competitors obviously know this and I suspect it will come up at some point. He said, well, Newsom hasn’t said anything about it. I said: oh, come on – this could come out a month before the primary. You need to get it together. You need to fix this and get a better story or this is going to be really bad for you. Yves is not going to stop writing about this. He said: well, she’s just wrong… I just said, Oh, please. Good luck. And left. Also, somewhere in there I said, you watered down that assembly bill [on private equity transparency]. And he whined, I had no support.

Notice what is going on here. Chiang could have chosen to duck this line of questioning truthfully by saying something like, “We are just getting more information about options, no decision has been made.” He is instead aggressively defending what is going on even as highly regarded, mainstream publications like Private Equity International have raised eyebrows about CalPERS’ rushed and inexplicably narrow solicitation process. 1

Even worse, the defense is flat out false. Chiang flatly misrepresented what is happening. CalPERS is not planning to bring more private equity in house or taking steps to reduce fees.

The Request for Information that we posted last week is crystal clear on what is being set in motion: CalPERS is looking to give investment discretion, as in control over the money, to an external manager who will then pick private equity funds and/or co-investing. The proposal also amusingly makes clear that the hired gun is to go to lengths to present the sham that this is a CalPERS program, as opposed to “XYZ Fund Manager Scheme”. Specifically:

It is important to note that with this strategic partnership initiative (Strategic Partnership or Partner) CalPERS does not intend to create a standard “Fund of Fund” relationship or consider this to be an outsourcing of responsibility. Instead, CalPERS desires to create a collaborative partnership where the Partner has investment discretion, but works with CalPERS PE Staff in the development of an annual allocation plan that CalPERS will approve. The Partner is expected to act as an extension of CalPERS Staff and continuously dialogue with CalPERS PE Staff on the management of the Portfolio. CalPERS is open to any legal structure that will help it achieve these goals.

If Chiang really does not understand what a sham this is, he doesn’t deserve to be Treasurer, much the less Governor. All that counts in that paragraph is that the partner will have investment discretion. The fact that it has to talk to CalPERS a bit more than in the typical fund of fund arrangement is optics.

This bears no resemblance to the so-called “Canadian model” in which seven Canadian pension funds have been doing more private equity in house. The only way that can be construed to be happening, as one wag said, is CalPERS would be getting a Canadian, in the form of its head of private equity, Mark Wiseman, if CalPERS were to go with BlackRock, which certainly appears to be the plan.

And as we’ve also written, the idea that this will lower fees is false. It will increase them, on the order of at least $50 million per year of base fees if CalPERS were to outsource its entire portfolio. And that’s before you get to the fact that an outside manager will typically take 10% of the profits, which will cut further into CalPERS’ returns.

But observe further: Chiang is not only abjectly misrepresenting what is going on, he is also presenting himself as being the moving force behind it. Now why might that be?

Chiang is taking a pro-private equity position (have CalPERS pay more fees) amid his gubernatorial bid. Private equity in general is one of the biggest, if not the biggest, donor group. And even though fund managers are supposedly prohibited from giving money to the campaigns of public pension funds trustees, there are well-established ways of circumventing the rules: have the donation made by the an in-law or wife of a financial firm executive (even better under her maiden name) or the executives of a private equity portfolio company. These routes are so well known that in major US cities, the big consultants can look through donor lists and identify how they are connected to the almost certain actual source of the funds.

The potential upside to Chiang’s fundraising would also explain another feature of this “partner” search that we’ve found difficult to explain: that false urgency. When CalPERS first presented this idea to the board, it made it sound as if it was proceeding in a very deliberate manner, with the next step being that the board would be briefed on possible legal structures in six months. The sudden change to a rushed process that looks designed to favor one party is consistent with needing to show sufficient progress before election time.

Californians who view Chiang as a bona fide progressive may take umbrage at this line of inquiry. However, if you care about a candidate’s policy positions, the most reliable guide is his past actions. Chiang supporters need to look hard at what he has done at CalPERS. Just because you don’t like Gavin Newsome does not mean that Chiang should get a free pass.


1From its January 11 article, Decoding the CalPERS request for information :

. But right before the industry disappeared for the holidays, CalPERS sent out a request for information for a private equity strategic partner, plus a questionnaire for potential partners to fill out.

Here are the highlights.

– It’s not open to everyone

In the document, CalPERS wrote “the process is very targeted, and will only be open to those that CalPERS invites to participate in the process”. It is unclear which firms have been invited to participate.

CalPERS declined to comment further, citing the solicitation’s active status.

– There isn’t much time

The solicitation opened on 21 December 2017 and will close at 5pm PST on 19 January.

The fact that CalPERS launched such a major process over the Christmas and New Year period has not escaped criticism, and the critics have a point. The questionnaire asks for detailed information on, among many other things, the firm’s approach to the due diligence process, deal pipeline, negotiating and monitoring across all relevant investment strategies, a detailed compensation structure and a “proposed dollar amount of firm capital which would be invested alongside CalPERS”. Not information that can be pulled together at the last minute.

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  1. cnchal


    The pirates have a hostage that Chaing cares about hidden in the slaves galley, could be one answer.

    Flat out corruption the other.

  2. The Rev Kev

    They must really hate this site over at CalPERS. Probably find that they have Naked Capitalism bookmarked on their browsers and check it several times a day to see if there are any new CalPERS stories here. Perhaps it is because they think that they may be one election away from having an investigation team come busting in but I am willing to bet that at least a few people are collecting CalPERS stories from here along with comments for source material for future lines of investigation.

    There must be a stack of people in California sharing these articles too as it affects their future so much. This story may be Californian in origin but I find it fascinating in how an entity can go on just randomly ignoring laws and regulations and constantly get away with it – that is, until circumstances change and then it will all comes back to haunt them. But then again, you would think that the Republicans would use CalPERS as a political punching bag to gain votes against the Democrats. Call out Senators Dianne Feinstein and Kamala Harris on their bailiwick. Or do they?

  3. Tom Stone

    I’m sure our dedicated public servants will be all over this like stink on shit.
    If they aren’t too busy with more important matters…
    Where is Attorney General Becerra?
    The Gov?
    The legislature?
    Busy with more important matters.

  4. bob

    Trump talk. No substance, or written coherence, only the words he want’s you to remember-

    “Canadian model where in the Canadian model”

    Is that him foaming the runway for his healthcare policy sellout to PE?

    “Those evil Canadians and their public healthcare. Next they’ll want public pension funds. Canadian!”

    1. cnchal

      The “Canadian model” of which the Ontario Teachers Pension is probably the best known buys things like shopping malls in Spain, and airports in Europe. Their investments are focused on setting up toll booths wherever they can. Rentiers is what they aim to be.

      Pirate Equity really can’t saddle up these entities with moar debt to pay themselves hundreds of millions in bonuses, because they are already saddled up with humongous debt and the numbers don’t work.

      What Pirate Equity is great at doing is saddling up smaller companies that create new wealth with back breaking debt, and extracting the bonuses from there, leaving a hulk that will never pay a penny of income tax again. This destroys the local tax base as eventually that burned out hulk of a formerly operating company collapses.

      The money geyser only goes in one direction. Gusher up, then goes dry fast.

      In effect Calpers is handing money to the Pirates, so that the tax base of other jurisdictions is destroyed, and a tiny bit of the loot leaks back to Calpers. So what Calpers does affects everyone outside of California at least equally if not more, as much as everyone in California.

  5. Clive

    It is ridiculous to suggest that BlackRock would in any way seriously consider knowledge transfer to CalPERS. No consultancy shop, no business whose only asset is specialist know-how, no-one senior with skills that make them marketable would ever enter into any sort of agreement to somehow magically upskill CalPERS’ in-house staff.

    For a start, how would any such intellectual property transfer agreement be constructed? What would the measures be so the buyer knew they got what the seller was promising them they’d get? How would you get good data to fulfil the measures? What is the value of the knowledge? Is the investment ability BlackRock keep trumpeting they have a fixed set of skills, or do you need to keep your skills refreshed as they get stale over time? If the skills become degraded with age, how do you keep them current? And even if all that weren’t true, how to you appraise what BlackRock is selling CalPERS against what a competitor might offer them? Where was the procurement guidance and oversight to all this?

    What CalPERS is saying BlackRock have sold them is meaningless drivel. No commercial contract could ever be drawn up delivering what Chiang is saying BlackRock will deliver. Either he is being highly misleading himself, of BlackRock is misleading him and he’s being duped. Whichever one it is, it makes him unfit for office.

    I’ve always thought CalPERS was the dumb money in the room. But this isn’t just dumb, it’s la-la land self delusion. My TBTF is extraordinary gullible but at least we’re have systems and procedures in place to stop idiotic managers buying in blatantly obvious bad deals. The emptiest of air headed valley girls would take one look at BlackRock’s proposition and say “hey, wait a minute mister, I think you’re scamming me here…”

  6. sd

    Is there anyway to ask all of the primary candidates where they stand on this issue in the hope of elevating the topic to debate now?

  7. diptherio

    Re: Chiang as a bona fide progressive

    Please, Californians, hold this chucklehead accountable. I am of the firm belief that one of the major (if not the major) problem with our national politics is that no one ever wants to hold their own politicians accountable. Everybody loves to point the finger across the aisle, while remaining blind to the wrong-doing on their own side. So people like Chiang get to skate by on some (occasionally) pleasing rhetoric, while giving away the store to their corporate buddies. If we stand idly by and let them do it, well….you get what we have today.

        1. Elizabeth

          Thanks Yves for posting this. I’m not a CalPERS recipient or expect to be, but after reading this I certainly won’t vote for Chiang. If it weren’t for NC, Californians would not have the inside dope on what CalPERS is doing. The corruption is breathtaking!

  8. tegnost

    follow the money, I guess, I wonder what his stance on net neutrality is considering he’d like to be gov of silicon valley. Good of the questioner to rattle Chiangs cage by pointing out what the denizens of NC already know, that yves won’t stop writing about this, and it’s in her area of expertise so it will have an impact. It still needs to be proven, however, that Californians can see beyond the almighty dollar, as selling out for one of them has replaced crystal woo as the state religion, and although I did notice some chips in the iceberg while there over the holidays it remains a ruthless economy.. Thanks for continuing to shine a light on this issue.

    1. cnchal

      The pension destroying Pirate Sector will save us!

      SHAPIRO: Did Fink explain in this letter what he means by social responsibility or making a positive contribution to society?

      YDSTIE: Well, what he said was that many governments are failing to prepare for the future on issues ranging from retirement and automation and worker training, so society is now turning to the private sector, to companies to respond to these challenges. And he notes that a big part of the polarization we see in the U.S. and around the world today comes from a lack of job and retirement security, especially for workers who don’t have much education.

      Governments that are selected by the elite, Trump being a cherry bomb thrown into Fink’s lap. Too bad he’s a dud, handing Fink moar billions with the “tax cuts” for the rich.

      That last bit is code for stupid men (and women) that make stuff.

      YDSTIE should change his name to Ditzie, for accuracy’s sake.

      NPR = turd polishers.

  9. EoH

    Fifty million in added fees, with less visibility and accountability for inevitably higher risk bets, would seem a big ask. How many firefighters and other first responders a year would that pay for? How many teachers and ag inspectors? How many more pensions paid?

    A thorough examination of Chiang’s donor list, with a look through into where the money really comes from, would seem to be in order. He’s committed to outsourcing to private equity. That should disqualify him from being governor. There’s usually a quid pro quo for it. California has somewhat more money on the line than would Wyoming or West Virginia – and considerably more liabilities to meet. Worth examining more closely than Trump’s height and weight.

  10. leapfrog

    I don’t know why I’m disappointed in Chiang (why is it that anyone would pin their hopes on a politician anyway?), but there goes my idea of voting for him, as I’m not a Newsome or a Villaraigosa fan. Thanks for the story though.

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